dumb question alert: Why does a company buy back shares of its own stock? What's the strategy or benefits to it?
Got a tip for us?
Let us know
Become a MacRumors Supporter for $50/year with no ads, ability to filter front page stories, and private forums.
Apple Board Has Been "Considering" Dividends and Buybacks Since 2005
- Thread starter MacRumors
- Start date
- Sort by reaction score
Wirelessly posted (Mozilla/5.0 (iPhone; CPU iPhone OS 5_0 like Mac OS X) AppleWebKit/534.46 (KHTML, like Gecko) Version/5.1 Mobile/9A334 Safari/7534.48.3)
Doesn't make sense for the most succesful public company around to go private and I don't see many real advantages besides increased secrecy.
ctdonath said:
Doesn't make sense for the most succesful public company around to go private and I don't see many real advantages besides increased secrecy.
They're foolishly spending their cash reserves on lawsuits against their competitors all over the world, 99% of which they have lost to date. Just saw an article that said Apple had spent over $100 million in legal fees.
As a long time seasoned investor who holds a broad portfolio, including a robust number of Apple shares. The 7 year period of highly skilled double talk & refusal to issue dividends speaks volumes of Apples obsession with control. While no surprise, I don't see any logic being applied at anytime soon.
Well the sad thing is $100B doesn't make much of dent in our currently yearly deficit let alone debt.
...or my favorite visualization... http://usdebt.kleptocracy.us/
A couple of reasons, it diminishes the supply of stock on the open market thereby lessening the ability of any entity gaining too much control by buying up a large block of stock or depending on the corporate structure, a hostile takeover. Diminishing the shares available to trade on the open market also is a tactic to get the price up, although Apple doesn't need any help there. And lastly, should they decide to pay dividends there will be fewer shares outstanding in which to pay dividends to, which translates into either Apple paying much less than they would have paid or for their existing (loyal) shareholders to get more per share than they would have gotten.
Another point the article doesn't touch on is that the bulk of this cash is sitting overseas so that Apple doesn't have to pay taxes on it.
Apple actually does rather well in its court cases, it not even close to 99% "lost". The question is how much money does Apple make / keep / cost others in favorable out comes from those legal actions compared to their cost? I would bet at worst it is a minor loss.
Last edited:
Wirelessly posted (Mozilla/5.0 (iPhone; CPU iPhone OS 5_0 like Mac OS X) AppleWebKit/534.46 (KHTML, like Gecko) Version/5.1 Mobile/9A334 Safari/7534.48.3)
Apple is very good at stimulating the economy with how they do things now. Saying they should mindlessly spend 50 billion dollars is crazy. It is not how they have grown to the point now where they have so many jobs tied to them and positive impact on the economy.
What you suggest is just not smart.
LordVic said:
Apple is very good at stimulating the economy with how they do things now. Saying they should mindlessly spend 50 billion dollars is crazy. It is not how they have grown to the point now where they have so many jobs tied to them and positive impact on the economy.
What you suggest is just not smart.
That was not a dumb question. It was quite smart.
Stock buy backs increase the value of the stock by taking some off the market. They are best when the Board of Directors thinks the P/E (Price of the stock / companies earnings) does not reflect the future value of the company.
Lets say your companies stock sells for $1 per share. Lets say you think it should sell at $5 per share. You use some of your cash on hand to purchase up some of the stock, taking it off the market. This will make the remaining stock go up (Adam Smith supply, demand and all that stuff). Later, when you want to purchase something big, you put that stock back on the market for something like $3 per share and use the money to destroy your competition.
It's not "hoarded" in terms of stuffed under a mattress. It's invested, loaned, and otherwise stimulating the economy. Even your "cash" in the simplest bank savings account has been loaned out to others, letting them leverage opportunities to stimulate their economy. It IS being re-circled into the economic ecosystem. In addition, the pile of "cash" (what little is in fact sitting in a pile ready for immediate use) is still there for Apple to draw on with short notice and stimulate the industry by motivating suppliers to invest in ways they hesitate to (if ever) on speculation, moving everyone forward.
Inject $50B back into the economy? Re-circulate? Apple earned over $100B in revenue last year, pushing 75% of that into paying costs and investing some $25B in profit - how much more "injecting" and "re-circulating" do you expect of a company? And, by following your implication, how could a government possibly do any more good with that money than exactly that?
Wrong. Apple DID pay taxes on it - just to the jurisdictions that cash was earned in. Crazy to expect any company to pay fair legal taxes, only to suffer another 35% tax just to move it home.
Don't forget, it also increases the cost of messing with Apple. Lets say there were two companies, Apple and Grape. When a company infringes on Apple, they take things to court and win or lose, they make the bad guys hurt. Grape just blows it off and goes out to lunch.
Now, lets say you are Copymattic and you are looking for a company to rip off. Nine out of ten times, you will go after Grape.
The economic law of supply-and-demand disagrees. At those "overpriced" rates, they can't make the stuff fast enough - while other companies making "similar" items can barely move product in comparison.
A thing is worth exactly what another is willing to give for it.
And there's no question people are willing to pay those prices for what amounts to "luxury goods".
Do you think Apple is hiding this cash under a mattress someplace? Apple has put this money in various short and long term investments around the world. This releases the money into the economy (Apple swapped cash for shares, etc.).
Apple also maintains a large number of, on average, high paying jobs directly and many more indirectly in the US and around the world (supply chain, manufacturing, 3rd party software developers, 3rd party hardware developers, 3rd party support, etc.).
They have also used their cash at various times to fund suppliers / partners with large preorders, etc.. This funding allows the suppliers to build and create jobs, etc.
...my personal pipe dream...
Apple takes some of that cash and builds a flexible and capable manufacturing center in the United States and helps restart those types of jobs in the US. This is a pipe dream given current realities in the US labor force size/composition, labor laws, cultural mindset, etc. compared to other locations around the world.
Last edited:
It's actually an excellent question.
It's a way of returning profits to the corporate owners (the stockholders) that is more tax-advantaged to them than dividends (capital gains rather than ordinary income). It has the additional advantage that it can be a one-time event; with dividends, once you start to pay them out, it's expected by the market you will continue to pay them regularly.
Other people have provided reasonable explanations as to why you want to return profits to your shareholders. The only thing I would add is that the whole basis of why a stock is valuable is based on the assumption that the company will eventually pay out money to whoever is holding the stock.
Last edited:
This viewpoint is just tragic. One of the main reasons the US is in such trouble at the moment is that too much of its wealth has been frittered away in some deluded keynesian broken window fallacy.
Spend the money in productive, business building practice, sure. The problem is finding the best way to use it. Apple earned that money, so they are no doubt disinclined to waste it. Only politicians are inclined to piss money up against a wall in a way that doesn't end up earning real money.
If looked at in a positive way, Apple has worked out how to build things that are so desirable they have created their own demand. It should find new ways to make shiny, desirable things that people want to buy. Which is course, exactly what it does, and is thus rewarded by the market.
Keynesians, on the other hand, fantasise that creating artificial demand by spraying money around somehow builds the economy. All it does is kick the problem down the road. meantime, the few US businesses that have worked out how to do things properly like Apple are castigated, rather than used as an example for others to follow. It's just like the story of the little red hen.
The other particular aspect of Apple's "problem", of course, is that most of that money is abroad, and Apple can't bring it back without paying US tax on money it has already paid tax on in the country it was earned. Kind of a massive own goal there, America.
Don't forget, when a company issues a dividend, from the company's perspective, the value of the money is gone. When you issue a stock buyback, you keep the value of the stock and can reissue it any time you want. (Preferably for more than you paid to buy back the stock.)
I'd rather see a stock split of 5:1 when the price reaches $500/share, though 10:1 would be much better.
For me, $50/share would make me a millionaire when it reaches $200 again.
For me, $50/share would make me a millionaire when it reaches $200 again.
I'm not sure exactly what you are talking about. You may be mixing in some legalism about public offering mechanics with real financial valuations.
When a company buys its own stock back, said stock loses all its value. A stock has value as a claim on the profits of a firm, and when the stock is bought back by the issuer, the claim no longer exists. Therefore, it has no value. This is Finance Theory 101.
Outside of the tax consequences, there is no difference in financial valuation between a one-time cash payout without a stock buyback (a cash dividend) and a stock buyback. And there is no difference in where the cash ends up.